Companies Act Section 180

Companies Act Section 180: Restrictions on Powers of the Board

1. Powers Requiring Special Resolution Approval

Under the Companies Act, Section 180, the Board of Directors of a company is restricted from exercising certain powers unless prior consent is obtained from the company through a special resolution. The following actions require such approval:

(a) Disposal of Undertakings

The Board shall not sell, lease, or otherwise dispose of the whole or substantially the whole of the company’s undertaking unless a special resolution is passed. If the company owns multiple undertakings, a special resolution is also required for the disposal of any one such undertaking.

Explanation:

The term “undertaking” refers to any investment of the company that exceeds 20% of its net worth, as per the audited balance sheet of the previous financial year, or any undertaking that contributes 20% or more of the company’s total income during the last financial year.
The phrase “substantially the whole of the undertaking” refers to 20% or more of the value of the undertaking as recorded in the audited balance sheet of the preceding financial year.
(b) Investment of Compensation from Mergers or Amalgamations

The Board shall not invest the compensation received from any merger or amalgamation in securities other than trust securities, unless authorized by a special resolution of the company.

(c) Borrowing in Excess of Paid-up Share Capital and Free Reserves

The Board is prohibited from borrowing funds that exceed the aggregate of the company’s paid-up share capital, free reserves, and securities premium, unless a special resolution is passed in a general meeting. Temporary loans obtained from banks in the ordinary course of business are exempt from this restriction.

Explanation:

Temporary loans refer to loans repayable on demand or within six months from the date of borrowing, such as short-term loans, cash credit arrangements, bill discounting, and seasonal short-term loans. Loans taken for capital expenditure are not considered temporary loans.
For banking companies, the acceptance of public deposits in the ordinary course of business, repayable on demand or otherwise, and withdrawable by cheque, draft, or order, shall not be classified as borrowing under this provision.
(d) Remission of Debt Owed by a Director

The Board cannot waive or extend the repayment period of any debt owed by a director unless authorized by a special resolution.

2. Special Resolution Requirements for Borrowing Powers

If the Board seeks approval to borrow funds beyond the prescribed limit, the special resolution passed in the general meeting must specify the maximum amount up to which the Board is authorized to borrow.

3. Exceptions to the Restriction on Disposal of Undertakings

The provisions of clause (a) in sub-section (1) shall not affect the following:

(a) Protection of Buyer’s Title

If a buyer or lessee acquires a company’s property, investment, or undertaking in good faith, the validity of the transaction shall not be affected by this section.

(b) Transactions in the Ordinary Course of Business

If the company’s ordinary business includes the sale or lease of property, these transactions shall not require a special resolution, as they are part of regular business activities.

4. Conditions on Transactions Authorized by Special Resolution

A special resolution approving any transaction covered under clause (a) of sub-section (1) may impose specific conditions. These conditions may regulate how the sale proceeds from such transactions are used, disposed of, or invested.

Proviso:

However, this section does not grant the company the authority to reduce its capital unless such reduction complies with other provisions of the Companies Act.

5. Validity of Borrowings Beyond the Prescribed Limit

If a company incurs debt beyond the limit specified in clause (c) of sub-section (1), such borrowing shall be deemed invalid and ineffective, unless the lender can prove that:

The loan was advanced in good faith.
The lender was unaware that the company had exceeded its borrowing limit.
This provision serves as a safeguard to ensure that creditors who advance loans in good faith without knowledge of a violation are protected, while companies remain accountable for adhering to statutory borrowing limits.